Fee calculation, negotiation and

management for architects

A three part approach:

1. Calculating the fee (resource-based)

2. Negotiating the agreement (adding value)

3. Managing fee collection (cash flow)

THE ROLE OF BENCHMARKING

 Fee calculation, negotiation and
management for architects

The value of the product is not what it costs to provide or

produce, it is the value the customer puts on it.

Owen Luder:
Cash is king! If you run out of money - you go bust!
Image courtesy of FreeDigitalPhotos.net You are more likely to become involved in a legal dispute over your
fees than any other issue in your practice.

Paul Nicholson:
The profession itself should treat architecture as a profession and as
a business, not just an exciting and a liberating profession.

Andrew Sobell
When it comes to improving profits and cash flow, the golden rule is:
what you can measure, you can manage.
 Value

The value of the product is not what it costs to provide or

produce, it is the value the customer puts on it.

Mark Twain:
You can tell German wine from vinegar by the label.

Image courtesy of FreeDigitalPhotos.net

Oscar Wilde:
Anyone who lives within their means suffers from a lack of
imagination.

Dr Scholl
Early to bed. Early to rise. Work like hell and advertise.

Victoria Beckham:
I want to be as famous as Persil Automatic.
 Defining Value

Image courtesy of FreeDigitalPhotos.net

After Prof. Hennes de Ridder

 Making a profit

put a realistic price on the product (accurately assess the

time and resources required)
understand the market and its risks
assess the value you place on your work
establish robust management procedures
regularly monitor professional performance
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issue timely invoices

regularly monitor financial performance and cash flow

The only element of a professional service that can be

measured is the time taken to provide it. All the hours in the
working day have a price; there is no 'free' time.
(Architects Handbook of Practice Management)
 Fee calculation

Calculating a Fee offer:

Assess the risks and uncertainties:
the client (resources, reputation, knowledge)
project definition
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scope of services
programme/timescales
resources requirements

Assess the benefits and opportunities:

enhanced profits
employment for existing staff
business expansion
new market sectors
quality of work
 Fee calculation

Key influences on resource requirements:

Type of procurement and scope of services
Size of project
Complexity of project and specific project requirements
Extent of works to existing buildings
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Repair and conservation of historic buildings
Degree of design repetition
Practice size and overheads

Key influences on brand value:

Practice reputation
Practice location
Practice culture
Specialist skills
 Fee calculation

Traditional fee calculations:

Table 1: New Works

Image courtesy of Ernest von Rosen
(www.amgmedia.com)
Miniumum charge for completed
Total construction cost Minimum per cent rate work stages C to H

Up to 2,500 10
2,500 - 8,000 8.5 250
8,000 - 14,000 7.5 680
14,000 - 25,000 6.5 1,050
25,000 - 750,000 6 1,625
750,000 - 1,750,000 5.75 45,000
1,750,000 and over 5.5 100,625

Source: RIBA Conditions of

Engagement 1971 (mandatory
fee scale)
 Fee calculation

Traditional fee calculations:

New work 25K 50K 75K 150K 500K 1M

Private housing 10.7% 9.9% 9.5% 8.7% 7.3% 6.5%

Image courtesy of Ernest von Rosen
(www.amgmedia.com) Leisure 9.5% 9.1% 8.8% 8.3% 7.5% 7.1%

Offices 8.8% 8.4% 8.1% 7.6% 6.9% 6.4%

Industrial 6.3% 6.0% 5.5% 5.5% 5.0% 4.7%

Retail 7.1% 6.8% 6.6% 6.2% 5.6% 5.2%

Public housing 8.5% 7.9% 7.5% 6.9% 5.9% 5.2%

Health 10.5% 9.6% 9.1% 8.3% 6.8% 6.0%

Education 7.2% 7.0% 6.9% 6.6% 6.2% 6.0%

Illustrative table showing approximate values for average fees

based on the results of the independent annual fee survey
carried out by the Fees Bureau, 2007
 Fee calculation

2D CAD
Resources

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BIM

A B C D E F G H J K L

Work stages
 Fee calculation

Fee options:
(There is no standard or recommended fee scale and no standard method of calculation.
The fee is a matter for negotiation between the client and the architect.)

emperical calculations (traditional) v resource allocations + profit

margin and added value
partial services
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fixed lump sums (higher risk than percentage fees, must have
provision for adjustment for client changes)
calculated lump sums, based for example on estimated construction
cost at the start of each work stage
time charges
value-added or betterment fees
 Fee calculation

Work stage fees

Work Stage Optimum Alternative
(A and B Time charges)
C Concept 20%
D Design Development 20% 35%
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E Technical Design 15%

F Production Information
G Tender Documentation 25% 35%
H Tender Action
J Mobilisation
K Construction to hand-over 20% 30%*
L Rectification period _____
*includes F2 100% 100%

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Fee negotiation
Presenting the fee offer:
Is the fee offer in writing only, or to be part of an
interview/selection process?
Is the fee offer made in competition?
How much do you know about your client?
Who will influence the decision?
What will add value to the project?
What type of fee arrangement is likely to be
acceptable?
Is the offer clear?
What is the product that you are selling?
 Fee negotiation

Closing the deal:

recognise the clients values and aspirations, both explicit and

implicit
establish rapport
Image courtesy of FreeDigitalPhotos.net
explain the benefits of the offer
remove any uncertainty and address objections
a resource allocation approach is very helpful when a client is
seeking a fee reduction; monthly invoicing regimes ensure cashflow
nothing is agreed until everything is agreed
always confirm what has been agreed
the client will probably desire certainty and a fixed fee, but the
architect has to balance this against the actual degree of uncertainty
and associated risk
working without an appointment agreement and agreed fee
schedule is work at risk
 Fee management

GOLDEN RULES for a healthy fee regime

have a comprehensive appointment agreement in writing
check the name of the client in the agreement is the same
as you anticipated?
state clearly the clients requirements and the scope of the
services to be provided
ensure the client understands the payment provisions
dont undertake work which is beyond the resources of the
Image courtesy of FreeDigitalPhotos.net practice.
identify separate work stages and get each stage signed
off
establish rigorous procedures for managing fee accounts,
invoicing and chasing debts and maintaining cash flow
resist pressure to start any work until the agreement is
signed
 Fee management

Relationship between turnover and working capital

Working capital = fixed assets + cash + debtors +
accrued income (work in progress) - creditors
Faster turnover = less working capital required
Architects require more working capital than many
other business because of the extended time period
of construction projects
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Prompt and regular invoicing and collection of fees is
the main lever to accelerate the speed at which
money circulates through the business and reduce
the need for working capital
The Tesco model money-in quick, money-out
slow
 Fee management

Relationship between project and practice finances

Management of project finances and practice
finances simultaneously
Businesses fail mainly because they run out of cash,
not because they are intrinsically unprofitable
Monthly management accounts are essential to
monitor monthly and year-to-date variances
Image courtesy of FreeDigitalPhotos.net
Monitor key performance indicators (turnover by
director, turnover per fee earner, profit as percentage
of turnover, profit per director, profit per fee earner,
liquidity)
Have effective project resource plans and monitor
project performance
 Fee management

Fee forecasting
Future captive fees (fees that are agreed,
documented, contractually binding and scheduled for
invoicing)
Possible fees prospects (50%+ chance of
conversion, 3x turnover) and suspects (50% -
chance of conversion, 2x turnover)
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Resource forecasting is the hardest forecasting
element
Cashflow forecast of particular interest to the bank!
Have effective project resource plans and monitor
project performance
 Fee management

Fee forecasting
Use a Standard Form of Appointment Agreement
(key for risk management)
Invoice on a regular basis (monthly fee invoicing
assists cashflow and reduces risk)
Collect money owed (within 60 days)
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Charge additional fees when the brief is changed
Charge additional fees when extra work is added to
the scope of service (avoid commission creep)
Monitor project costs
Target fee bids on winnable work
Relate fee bids to resource analysis
 Fee management

Options in the event of non-payment of fees:

Enquiry and negotiations

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Interest charges and debt collection costs
Adjudication, arbitration or court action
Suspension/termination
Revocation of licence
 Fee management

Fee adjustment:
RIBA Standard Agreement, clause 5.8

The Basic Fee shall be adjusted:

Image courtesy of FreeDigitalPhotos.net (5.8.1)

including due allowance for any loss and/or expense if:

(a) material changes are made to the Brief and/or the

Construction Cost and/or the Timetable.and/or

(b) the Services are varied by agreement.

 Fee management

Additional fees:
RIBA Standard Agreement, clause 5.9

Where the Architect for reasons beyond the Architects reasonable control
incurs extra work or loss and expensethe Architect shall be entitled to
additional fees calculated on a time basisMatters in relation to which the
Image courtesy of FreeDigitalPhotos.net
Architect shall be entitled to additional fees include:
(5.9.1) the Architect is required to vary any item of work commenced or
completed.or to provide a new design after the Client has authorised the
Architect to develop an approved design;
(5.9.2) the nature of the Project requires that substantial parts of the design
cannot be completed or must be specified provisionally.before construction
commences;
(5.9.3) performance of the Services is delayed, disrupted or prolonged; and
(5.9.4) the cost of any work, installation or equipment for which the Architect
performs Services is omitted from or not included in the Construction Cost

The Architect shall inform the Client on becoming aware that this clause will
apply.
 Fee management

Evidence needed to claim additional fees:

In order to establish that you have been involved in extra

work and have incurred extra expense, for reasons
beyond your control; i.e. not as a result of lack of skill,
Image courtesy of FreeDigitalPhotos.net care or diligence on your part, you need:

Evidence of the work you would have been involved in

and the expense you would have incurred in performing
the contractually agreed scope of services.
Evidence that the reasons for the need for the changes
in the scope of services were beyond your control.
Evidence of how the work and expense is affected by the
material changes that have occurred.
 Fee management

Records (contemporaneous) required to support a claim:

Project budget, demonstrating the costing of the original scope of

services.
Statement of net fee, after contributions to profit and overheads
(excluding those included in the hourly rates).
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The number of hours (costed at the appropriate hourly rates)
available at each work stage to complete the Services.
(Check that the hours are realistic for the scope of services
required).
Records of monitoring against budget at each work stage using
coded time management records.
Record of material changes and variations and their consequence
for the Services and their delivery, with accurate time records for
the extra work involved.
Correspondence with Client to inform them of the material
changes and their impact.
Out now

RIBA Fee Calculator:

Guide to using the RIBA Fee Calculator

Resource calculator
Fee calculator
Model answers to client FAQs
Good practice guidance notes on fee
management
 RIBA Fee Calculator

As I have a very limited budget, why should I pay you so much?

The fee we charge relates to the amount of work we will have to do. By reducing the
scope of our services we may be able to reduce the fee but this could increase the
risk to you. In our experience clients save on project cost by getting the design right
before starting construction and not changing things during the build. Very often it
turns out that this saving is greater than the amount clients spend on architects
fees.

When can I have cost certainty on the project?

Absolute certainty on the overall cost of a project is very difficult to achieve. We can
put mechanisms in place to help you manage your cost such as early estimates and
well planned designs. Minimising changes keeps cost controlled and putting aside a
contingency sum helps to cope with unplanned occurrences.

Can I have this all finished by Christmas?

Which Christmas?
RIBA Business Benchmarking

RIBA Business Benchmarking Service

available to all RIBA Chartered Practices
(obligatory for RIBA Chartered Practices)
a business enhancement, planning and development
tool
business benchmarking is widely used by the legal
profession
analysis focuses on four key areas:
financial performance
day-to-day management
business development
human resources
RIBA Business Benchmarking

Key Benchmarks
RIBA Business Benchmarking Service
RIBA Business Benchmarking

Over 60% of practices meet the Colander

Benchmark, achieving 15% profit as a percentage
of turnover.
45% of all fees come from the residential market.
60% of practices do not have a business plan:
only 16% plan beyond one year.
Practices in this survey average 15.3k profit per
fee earner.
Average turnover per fee earner has fallen to less
than 60k.
RIBA Business Benchmarking

Charge-out rates:
 RIBA Business Benchmarking

Client types by number of clients (%)

Micro practices: headcount 1 4; Large practices: headcount 50+

 RIBA Business Benchmarking

Client sectors by percentage of income (%)

Micro practices: headcount 1 4; Large practices: headcount 50+

RIBA Business Benchmarking

Interesting benchmarking facts:

D and B can be more profitable than traditional procurement for
architects
Large projects generally equal higher profits but project size needs
to related to practice resource
Partners/directors need to spend 20 30% of their time on non-
chargeable activities
The ratio of support staff to fee earners typically varies from 1:3 to
1:5
Education sector is moderately profitable but profit levels are
consistent
Commercial sector is very cyclical but can be highly profitable
Historically over the economic cycle housing has seen low profit
levels
RIBA Benchmark suggests that no more than 40% of practice
workload should be in a single sector
RIBA Future Trends Survey

RIBA Future Trends Survey launched in January 2009

RIBA Future Trends Workload index for Sep 2012 is -3
RIBA Future Trends Staffing index for Sep 2012 is -6
Private housing sector workloads forecast to be stable over the
next quarter
Practices in London and the South East are currently most
optimistic about future workload and staffing levels; some growth
anticipated here in the commercial and private housing sectors
Current workloads are approx. at 60% of those at the peak of the
boom (i.e. just over a one third fall in workload)
Current staffing (architects and support staff) at approx. 75% of its
peak level (i.e. about a one quarter reduction in total workforce)
Student (Parts 1 and 2) employment levels down by approx. 40%
Future Trends three month
workload forecast
Future Trends three month
staffing forecast
Future Trends three month
sector forecast
Fees and Fee Negotiations

Good Practice Guide: Fee management by

Roland Phillips
RIBA Publications Ltd
ISBN 978-1-85946-180-8
Getting Paid and Maximising Profit

RIBA Good Practice Guide Painless Financial

Management
By Brian Pinder-Ayres
RIBA Publishing Ltd
ISBN 978-1-85946-289-8

AIA Best Practice Guide

Financial Management: 10 Key Performance
Indicators
http://www.aia.org/aiaucmp/groups/ek_me
mbers/documents/pdf/aiap016508.pdf